Decoding the Google Tax

What is Google Tax

The central government is set to impose an ‘Equalisation Levy’ of 6% on cross-border digital transactions whose value exceeds Rs 1 lakh. Popularly called the ‘Google tax’, this is an indirect tax on foreign companies like Google, Facebook and Twitter for specified services they provide to Indian companies.

The equalization levy would apply at a rate of 6% on the gross consideration payable for a “specified service.”

Specified service is defined as follows:

• Online advertisement

• Any provision for digital advertising space or any facility/service for the purpose of online advertisement

• Any other service which may be notified later by the central government

The levy will be applicable on the payments received by a non-resident service provider from an Indian resident or an Indian PE of a non-resident in respect of the specified services.

The equalisation levy shall not be charged, where—

The Indian government’s decision to introduce equalization levy comes in the wake of  'Operation Tulip' by which French authorities indicted Alphabet, the parent company Google for evading back taxes of 1.6 billion Euros.

Some experts have hailed this to be a step in the right direction to tax companies accused of evading tax in various countries, whereas others have expressed the concern that it is likely to affect small Indian companies including start-ups.

Interestingly, as the levy is not part of the Income Tax Act, foreign companies would not get credit for the tax in their home country and therefore, may refuse to pay the tax. In such scenario, the principle of grossing up of the fee would apply so that the online company receives the original fee.

As the proposed ‘Equalisation levy’ is indirect, it falls upon Indian advertisers to collect the 6% tax and deposit it with the government. Hence it is felt that the Googles and the Amazons are simply more likely to increase the price of their products or services to recoup the taxed amount. The big internet platforms will "definitely pass on" the additional cost to companies — making it more expensive for Indian companies to advertise.

Thus, it is the Indian company and particularly the start-ups that lose out in the bargain as the cost of doing business increases, and there are no viable alternatives to their dependence on online resources. As the cost of operation increases, the price is also likely to increase for the end-customer.

Consequences of default

The amount collected as equalisation levy shall be paid to the credit of the Central government before the 7th day of the succeeding month.

If the Indian company fails to collect the 6% equalisation levy from international companies, that expense will be disallowed while calculating the taxable profit of the Indian company.

Delayed payment would attract interest at 1% of the outstanding levy for every month or part thereof for the period of delay.

Moreover penal consequences also follow:

Penalty for failure of payment:

−Equalization levy was not deducted: The penalty is equal to the amount of the levy that the assesse failed to deduct (along with interest and the outstanding levy amount)

−Equalization levy was deducted but not deposited:

The penalty is equal to Rs. 1,000 for each day the failure continues, but not to exceed the amount of the equalization levy that the assesse failed to pay (along with interest and the outstanding levy amount)

Every assessee shall, within the prescribed time after the end of each financial year, prepare and deliver a statement in such form, verified in such manner, in respect of all specified services during such financial year. Where an assessee fails to furnish the statement within the time prescribed under section 167 of the Finance Act, he shall be liable to pay a penalty of one hundred rupees for each day during which the failure continues.

To avoid double taxation of income which has been subject to an equalization levy, such income will be exempt in the hands of the non-resident under the Income Tax Act, 1961.